Central Bank in Europe Sees a Crisis Returning

The European Central Bank warned Thursday that a resurgence of enormous trade imbalances and growing government debt were creating a volatile mix that could ignite new economic turmoil.

“We may already have entered into the next phase of the crisis: a sovereign debt crisis following on the financial and economic crisis,” Jürgen Stark, a member of the central bank’s executive board, said Thursday in remarks prepared for delivery in Washington.

Mr. Stark’s comments echoed warnings in the central bank’s monthly bulletin, released Thursday, that said China and other developing countries were likely to again generate huge trade surpluses while the United States and other wealthy countries piled up trade deficits.

“The stakes are high to prevent a disorderly adjustment in the future that would be costly to all economies,” the central bank said.

Separately, a group representing global banks has expressed concern that the Group of 20 industrialized and developing countries was not following through on promises to create a more robust world financial system.

“The spirit of unity in addressing global challenges may be waning,” Charles Dallara, managing director of the banking group, the Institute of International Finance, said in a letter addressed to G-20 leaders before they meet next week in Washington.

The institute is an association of financial institutions, with more than 390 members in more than 70 countries. It called on G-20 officials to renew their commitment to make the regulatory changes outlined at their summit meeting in Pittsburgh in September 2009.

In bond markets, investors demanded higher premiums for Greek government debt as they came to believe a European rescue plan for the country was likely to provide only temporary relief.

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Jürgen Stark

The Greek bailout and the central bank’s decision to ease rules on the collateral it will accept for loans “set a bad precedent for other euro area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time,” Joachim Fels, an economist at Morgan Stanley, wrote in a research note.

Mr. Fels went so far as to say there was an increased risk that Germany and other countries would eventually decide to secede from the euro zone and form their own, more stable currency union.

The European Central Bank based its warning on indications that trade imbalances, which receded during the financial crisis, were returning as oil prices rose and trade regained momentum.

The current account deficit in the United States, which had shrunk to 2.6 percent of gross domestic product last year from a 50-year high of 6 percent, is likely to rise again, the bank said.

China’s surplus, which had fallen to 6 percent of gross domestic product last year from 10 percent in 2006, is likely to increase.

G-20 members have promised to address the imbalances, with exporting countries saying they will try to increase domestic demand and importing countries pledging to reduce government borrowing and increase private saving.

William R. Rhodes, vice chairman of the Institute of International Finance’s board and former senior vice chairman of Citigroup, emphasized the delicate balance between withdrawing economic stimulus too early and allowing budget deficits to expand for too long.

“Premature action on withdrawing stimulus, as we saw in the 1930s, can prolong the hardship of high unemployment, but delays in formulating strategies to address the large fiscal deficits can undermine confidence, generate market uncertainties and endanger growth prospects,” Mr. Rhodes wrote. “The markets have been clear already in expressing their concerns about fiscal sustainability.”

Mr. Rhodes said that high unemployment was feeding pressures for trade and financial protectionism. “It is important that the G-20 both move to roll back protectionist measures and complete outstanding free trade agreements,” he wrote.

A version of this article appears in print on April 16, 2010, on page B4 of the New York edition with the headline: Central Bank In Europe Sees a Crisis Returning. Order Reprints|Today's Paper|Subscribe